SEC Revises Rules Governing Asset-Backed Securities

Spurred by the financial crisis in 2008, the Securities and Exchange Commission (“SEC”) has adopted revisions to the rules governing the disclosure, reporting, and offering process for asset-backed securities. The main goal of the revisions is, according to SEC Chair Mary Jo White, to enhance disclosure requirements and make it “easier for investors to review and access the information they need to make informed investment decisions” (Chair White Speech on Asset-Backed Securities). The revised rules should ultimately permit investors to conduct their own due diligence in assessing the risk of investing in asset-backed securities.

Asset-backed securities (“ABS”) are created when financial institutions buy and bundle loans (e.g.  mortgages, auto loans, and debt securities) into a package that is then marketed to investors. The bundles are often divided into separate securities with varying levels of risks and returns. The payments made on the underlying loans generate the returns paid to the ABS investors. The securities are assigned a certain risk rating by various credit rating agencies according to the securitization structure of the loan bundle. The financial crisis brought to light several problems surrounding ABS and the offering process, including: a lack of transparency and oversight, insufficient enforcement mechanisms, and inadequate time for investors to review available information before making investment decisions. The SEC began to reform the process in April 2010 by issuing revised rule proposals for ABS, even before the adoption of the Dodd-Frank Act.  Final rules were adopted last month.

The new rules governing asset-backed securities aim to enhance transparency, better protect investors, and facilitate capital formation in the securitization market. The rules include provisions that require issuers to

  • Provide investors with asset-level information in a standardized, tagged data format for certain asset classes;
  • Allow investors more time to consider transaction-specific information;
  •  Remove investment grade ratings for ABS shelf eligibility; and
  • Institute amendments to prospectus disclosure requirements and Regulation AB.  

The revised rules will be effective 60 days after publication in the Federal Registrar. Issuers are required to comply with the majority of the revised rules within one year of publication. Offerings of ABS must comply with the asset-level disclosure requirements within two years of publication.

For more information about the revised rules for asset-backed securities see:

Jenna Disser